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It was not too long ago that contractors were being offered a seemingly endless number of schemes that allowed them to take home up to 90% of their income while simultaneously reducing their tax liabilities. Known as contractor loan schemes, they offered a way to funnel contractor income through multiple channels before being returned in the form of loans.

The government has since caught up with these schemes to the extent that they are cracking down severely. Beginning in 2019, a punitive charge on the schemes goes into effect. Depending on how much a contractor has taken in loans, the penalty could be severe enough to lead to bankruptcy.

The good news is that the government has offered terms of settlement for all affected taxpayers willing to take care of things before the new charge kicks in. We urge all affected contractors to take advantage of the settlement terms. They represent the best possible terms contractors are going to get from the government. Once the new charge comes into play from April 2019, HMRC is likely to have little compassion on those forced to pay.

How the Schemes Work

A contractor loan scheme is normally set up as a secondary company or trust. Contractors are invited to join as investors, funnelling their income into the scheme rather than taking it directly as payment for services rendered. The scheme then turns around and grants a loan to the contractor equal to or less than the amount put into the scheme. The money given on loan is not subject to tax.

A few years ago, HMRC began warning contractors and scheme operators that they did not recognise the schemes as tax compliant. They made the case that what were being marketed as loans were not really loans at all because they did not have to be repaid. The loans also do not carry the same kinds of terms and conditions as conventional bank loans. As such, HMRC determined that contractor loan schemes amounted to nothing more than tax avoidance.

In an effort to put an end to such avoidance, the government has decided to go after scheme participants by forcing them to either pay tax on any outstanding loans or calculate the amount of tax due on all of the money invested in such schemes and pay taxes accordingly. Those taxes will be accompanied by the previously mentioned charge beginning in 2019.

How to Settle with HMRC

Contractors can avoid the punitive charges by settling with the government now. Interested parties must contact HMRC right away and then provide the necessary documentation no later than 30 ^th September 2018. This will give HMRC sufficient time to investigate the contractor’s case and offer a suitable settlement

According to HMRC, settling now could mean:

• not having to pay the new loan charge coming in 2019;
• the opportunity to pay a lower rate of tax on disguised income; and
• avoiding litigation and the extra costs that come with it.

Contractors worried about not having the money to pay all the taxes due can request a payment plan. As long as a contractor’s expected taxable annual income is less than £50,000 and he or she is no longer engaged in tax avoidance, the contractor may be given up to five years to pay the tax bill without any penalty. Contractors who do not qualify under these terms may still be eligible for a payment plan. However, HMRC will consider such cases on an individual basis.

Finally, note that you will have to prove that your business has been properly classified in order to take advantage of the settlement. HMRC draws a distinction between contractors and employers. The terms of your settlement will be determined by how your business is classified.

There is a lot more to this than what has been described in this post. Suffice to say that if you have participated in a contractor loan scheme at any point in the past, you need to make every effort to get things settled with the government right away. Otherwise, you could be in for a big tax bill in April 2019.